RESEARCH PROJECT REPORT

ON

Impact of monetary policy in

tourism sector

COMPILED BY:
Sonu Kumar
ROLL NO. : ...............
THIRD YEAR
IHM BHOPAL
 Acknowledgement

In the course of completion of this dissertation, I received immense help

and co-operation from various persons and institutions. It is my sincere

duty to record appreciation for them.

I am Deeply Indebted To My Programme Coordinator And

Guide ..........................................., PROJECT GUIDE, Whose

Invaluable Support Helped In Successful Completion Of This Project.

Research Methodology
Research on any subject implies that an in-depth study has to be carried
on that subject. The in-depth study includes not only the printed and
already proven facts but its also calls for probing into the reason leading
to such an operational setup.
Research on a subject leads one to acquiring knowledge about “What”
was happening and “how” was happening “why” is that happening.
Various methods which have been used by the research includes the
surveys, questioner interviews, talks and discussions.
For collecting the data and the required information, I framed a

questionnaire which consist of certain basic and general questions

regarding the “Impact of monetary policy in tourism sector”.

I would hereby like to mention that my conclusions and information’s

are based on the collected information’s and their validity helds good to
the point that the provided information is very true and correct.
I have visited out institute library which has also helped immensely
during my research project.
I myself feel that I have done full justice to this research project. I feel
that I have inferred the collected data and information to the best of the
best of my ability and also to the best possible extend since my guide
was always there whenever and wherever I needed any assistance.
Abstract
This study investigates the effects of changes in monetary policy on the
stock performance of hospitality firms (airlines, hotels, restaurants and
tourism firms) in Hong Kong. Changes in the monetary policy
environment are measured by changes in the discount rate. Among the
four hospitality sectors, hotel and tourism stocks exhibit a higher mean
return and reward-to-risk ratio during expansive monetary periods.
Regression test results also support the contention that different
monetary policy circumstances have significant influences on the hotel
and tourism stock performance. Lastly, a market timing investment
strategy is proposed for hospitality stock investors to allocate their
portfolios between hospitality stocks and risk-free assets according to
movements in monetary policy environments. Following this market
timing investment strategy, hospitality stock investors can significantly
improve investment performance by achieving higher returns and lower
risk.
INTRODUCTION

It is widely believed that monetary policy has a significant

influence on security returns. The central bank conducts
monetary policy by regulating interest rates, which in turn
impact on a firm's cost of capital and the national economy.
Thus, changes in monetary policy, on the one hand, signal the
future movement of the economy by providing useful
information about potential economic conditions and corporate
earnings. On the other hand, the intrinsic value of assets, based
on the fundamental asset valuation model, equals the sum of
present value of all future cash flows discounted by the required
rate of return. Changes in monetary policy consequently affect
the valuation of financial assets through changes in the expected
level of future corporate earnings and/or the discount rate
employed in valuing these expected cash flows.

Empirical studies have supported the relationship between

monetary policy and security returns in the developed stock
markets (Conover, Jensen, & Johnson, 1999; Jensen &
Johnson, 1995; Mann, Atra, & Dowen, 2004) and in the
emerging stock markets (Chen, Chen, & Kuo, 2007a, 2007b).
There is a similar association in various debt markets (Baker &
Meyer, 1980; Cook & Hahn, 1988; Johnson, Buetow, Jensen, &
Reilly, 2003), in the foreign exchange market (Brown, 1981;
Neal, Roley, & Sellon, 1998), and in the mutual fund market
(Chen, Chen, Liao, & Lin, 2008; Johnson, Buetow, &
Jensen, 1999).

Several recent hospitality research papers have investigated the

connection between monetary policy factors and stock returns
(Barrows & Naka, 1994; Chen, 2007c; Chen, Kim, &
Kim, 2005). Barrows and Naka (1994) showed that the
macroeconomic variable, growth rate of the money supply, was
one of the significant explanatory factors of lodging stock
returns in the USA. Similarly, Chen et al. (2005) found a
positive link between money supply growth rate and hotel stock
returns in Taiwan, and Chen (2007c) illustrated that a time lag
change in the discount rate could significantly affect Chinese
hotel stock returns.
Unlike Chen et al. (2005) who explored the relationship between
economic variables and hospitality stock returns in Taiwan,
Chen (2007a) examined the Taiwanese hotel stock performance
under two different monetary policy conditions. As he noted, the
money supply has not been commonly used as a measure of
monetary policy stringency because of its frequent changes.
Instead, he used changes in the discount rate to measure changes
in monetary policy regime. An expansive (restrictive) monetary
environment is a period with a decrease (rise) in the discount
rate. He found that hotel stocks in Taiwan exhibited a higher
mean return and reward-to-risk ratio under an expansive
monetary environment. To examine whether the significant
impact of various monetary conditions on hospitality stock
returns is a general finding rather than unique to Taiwan, this
study investigates the hospitality stock performance across
different monetary policy periods in Hong Kong.

The Hong Kong stock market was founded in 1891 and consists
of the Main Board and the Growth Enterprise Market (GEM).
There were 975 companies listed on the Main Board and 198
companies listed on the GEM at the end of 2006. According to
the World Federation of Exchanges (2006), the Hong Kong
stock market ranked third in terms of total equity funds raised
and in terms of size (market capitalisation). The Hong Kong
stock market also ranked sixth among members of the World
Federation of Exchanges and was ranked second in Asia, after
the Japanese stock market. With strong economic growth in
mainland China and the high internationalisation of the Hong
Kong stock market, large amounts of foreign capital flow into
this stock market. The Hong Kong stock market has become an
important international financial channel.

The Hong Kong Tourism Board (2002) reported that Hong

Kong's strategic location as the natural gateway to both Asia and
China offers enormous advantages, such as being the
international gateway to mainland China and the first-choice
destination for travellers from China. Lew and
McKercher (2002) pointed out that US and Australian residents
frequently used Hong Kong as a trip gateway, especially to
China, and the residents of China also used Hong Kong as a trip
egress destination. According to the annual report of the Hong
Kong Tourism Board (2004), about 21.81 million tourists visited
Hong Kong in 2003, about 56% of whom came from China. The
relaxation in travel restrictions in 2002 and a huge demand for
outbound travel in Mainland China continues to provide
extraordinary opportunities for Hong Kong's tourism industry
(Hong Kong Tourism Board, 2003).

The World Tourism Organisation (2006) also reported that the

total number of international tourist arrivals to Hong Kong
reached 14.8 million, and tourism receipts were 10.2 billion US
dollars in 2005, which ranked number three and four,
respectively, in Asia. These positive trends can create boundless
opportunities for the hospitality industry in Hong Kong. In
consequence, the hospitality stocks in Hong Kong offer a good
case study and the results can shed light on the critical impact of
different monetary policy regimes on hospitality stock
performance. Moreover, this study offers hospitality stock
investors an explicit and practical stock market timing
investment strategy to allocate their portfolios in response to
shifts in the monetary policy environments. Hospitality stock
investors can significantly improve investment performance
based on this market timing investment strategy.
The remainder of this paper is structured as follows. The
hospitality stock data and monetary policy variables are
described in the second section. The third section constructs two
risk-adjusted performance measures on hospitality stock returns.
The fourth section shows the regression analysis and empirical
results. Implications for market timing based on the findings in
this study are illustrated in the fifth section. The final section
presents the conclusions and opportunities for future research.
Hospitality stock data and monetary policy
measures
The hospitality companies covered in this study needed to have
complete data on share price over the 14-year period from
August 1992 to August 2006. Based on this selection criterion,
we selected 10 hospitality-related firms in four sectors (one
airline, six hotels, two restaurants and one tourism firm). All 10
companies were traded on the Main Board.

Table 1 lists the sample firm data in the four hospitality sectors.
The monthly stock prices from August 1992 to August 2006
(169 monthly observations) are taken from the Datastream
database. We then computed the value-weighted stock price

index (SI) and stock returns (SR) for each sector: where
SI t and SI t −1 are stock prices at the end of the
months t and t−1, respectively. Table 2 provides the descriptive
statistics of the monthly returns of each hospitality sector as well
as the monthly market returns (i.e. the Hang Seng Index
returns). The four hospitality sectors had lower returns, higher
standard deviations and reward-to-risk ratios than did the Hang
Seng Index.
List of four sectors of sample hospitality firms. Table 1.
Summary statistics of stock returns.

As mentioned, we use changes in discount rate to measure

changes in the monetary policy. The discount rate is the interest
rate that the central bank charges banks when the central bank
provides reserves to the banking system by making discount
loans to banks. The central bank can conduct monetary policies
by regulating discount rates. If the central bank intends to pursue
a restrictive monetary policy, it would raise the discount rate. An
increase in discount rate can weaken a company's stock
performance for the following two reasons. First, firms need to
pay more for discount loans and thus lower corporate earnings.
Second, a rise in the discount rate makes a firm's corporate cash
flows worthless based on the stock valuation model.

The Hong Kong Monetary Authority (HKMA) discount rate data

from August 1992 to August 2006 were taken from the Taiwan
Economic Journal (TEJ) database. Table 3 presents the summary
information on the discount rate change series. As shown
in Table 3, the HKMA changed the discount rate 45 times,
raising it 27 times and lowering it 18 times, during the full
sample period. To measure different monetary policy months,
we compute the rate change series. Accordingly, we categorise
the entire sample period (169 months) as either restrictive or
expansive months. An expansive monetary condition is
characterised by the period with a decrease in the discount rate,
whereas a restrictive monetary environment is associated with

the period with an increase in the discount rate.

Discount rate changes series: August 1992–August

2006. Table 3.
In addition, the months remain under the same monetary policy
environment until a month in which a discount rate change in
the opposite direction is detected. The months with the first rate
changes in a series are omitted from the sample because the
months that mark the initiation of a new monetary condition
cover both expansive and restrictive days. As a result, 8 months
are removed from the full sample observations and 161 months
remain; 82 months follow discount rate decreases and 79 months
follow discount rate increases.
Stock performance under various monetary
policy environments

Table 4 shows the mean returns and the standard

deviations of monthly stock returns under two different
monetary periods. The data indicate that all stocks have
greater mean returns during expansive monetary periods
than during restrictive periods. Among them, the difference
in the mean return over two different monetary conditions
is 3.12% for hotel stocks and 4.12% for tourism stocks,
which are statistically significant
differences in their means at the 5%
and 10% levels, respectively. These
findings illustrate that hotel and
tourism stocks performed significantly
better under an expansive
monetary environment.

Mean returns and

standard deviations of
monthly stock returns. 
Table 4.
The standard deviations of market and hospitality stock
returns (except for the returns of airline stocks) are higher
in the restrictive monetary period than in the expansive
period. In other words, hotel, restaurant and tourism stock
returns are more volatile under a restrictive monetary
condition. The difference in standard deviations of hotel,
restaurant and tourism stock returns between the two
monetary environments is statistically significant.
Additionally, two indexes are used to evaluate the risk-
adjusted performance of the portfolio: the
Sharpe (1964) index and the Treynor (1965) index. Table
5 reports the Sharpe ratio (reward-to-total risk ratio) for
hospitality and market returns over the full sample and
both expansive and restrictive periods. The Sharpe ratio is
given as: where   is the mean annualised
return,   the mean risk-free rate and σ i the standard
deviation of the annualised returns. Taken from
the TEJ database, the monthly series of the 1-year time
deposit rate is used as the risk-free rate R f . The Sharpe
index of hotel stock returns is −2.05 over the entire
sample period, −15.02 during the restrictive period and
15.78 during the expansive period. The Sharpe indices of
all the four hospitality sectors are positive under an
expansive monetary environment and negative under a
restrictive monetary environment.
Sharpe and Treynor ratios of stock returns. Table 5.

The Treynor ratio for the

full sample and two
different monetary policy
environments is also
presented in Table 5. The
Treynor index measures
the reward-to-systematic
risk ratio and is given as:

where   is the

mean annualised hotel

stock return,   the

mean risk-free rate and
the β the estimated using
the capital asset pricing

model (CAPM) in Equation (4): where SR i is the

annualised stock return for sector i, R m is the annualised market
return and ϵ i is the residual term. Results in Table 5 also show
that the Treynor indices of all the four hospitality stock returns
are positive under the expansive monetary environment and
negative under the restrictive monetary environment.
In conclusion, Sharpe and Treynor values of hotel stocks are
positive only in the expansive monetary environment, implying
that hotel stocks offer a better reward per unit of risk in
expansive periods. Further, negative Sharpe and Treynor indices
of hotel stock returns in restrictive periods imply that hospitality
stock investors could have achieved better investment
performance simply by holding risk-free assets instead of hotel
stocks during restrictive monetary periods. Similar results are
detected for the airlines, restaurants, tourism and market index.
 Regression tests and test
results
To examine the link between stock returns and changes in
the monetary policy, we run the regression of stock returns
on the monetary policy dummy variables according to the

following equation: where SR t is the monthly

hospitality or market returns and DR_HK the dummy
variable for changes in the discount rate in HK, which
takes a value of one during restrictive monetary periods
and zero during expansive monetary periods. The
approach of Newey and West (1987) was used to attain
consistent estimates by correcting for the possible
presence of autocorrelation and heteroscedasticity in
Equation (5).

The regression results are shown in Table 6. Over the full

sample period from August 1992 to August 2006, the
coefficient of the dummy variable of changes in the
discount rate DR_HK is significantly negative for hotel and
tourism stock returns, but is not statistically significant for
airline, restaurant and market returns. These findings
imply that changes in the HKMA discount rate have a
significant impact on hotel and tourism stock returns, but
not on airline, restaurant and market returns. The negative
coefficient of the DR_HK dummy variable indicates that
restrictive monetary conditions are significantly associated
with lower hotel (tourism) stock returns, whereas hotel
(tourism) stocks experience higher returns in expansive
monetary periods.
Regression results of returns on dummy
variable of changes in discount rate. 
Table 6.

To further control for the

possible impact of other
variables on the
relationship between
monetary policy dummy
variable and stock returns,
we added four
macroeconomic factors
and three non-
macroeconomic events into
Equation (5) and perform
the following multiple
regression equation:
where MS, EINF, UEP and
EX denote growth rate of
money supply, inflation
rate, changes in
unemployment rate and
percentage changes in
exchange rate. Three
dummy variables D1997,
D911 and DSARS represent three recent non-
macroeconomic forces, the takeover of Hong Kong in
June 1997, the terrorist attacks of September 11, 2001 in
the USA and the severe acute respiratory syndrome
(SARS) outbreak in March 2003, respectively. Three non-
macroeconomic event dummy variables take the value of
one during the corresponding month on the event date and
zero otherwise.
As mentioned, stock prices equal the present value of all
future cash flows discounted by the discount rate, i.e.
stock prices reflect investors' expectations about future
corporate earnings and dividends. Since the economic
conditions usually influence the corporate earnings and
dividends, it is often observed that stock prices tend to
fluctuate with economic conditions (Chen, 2007b; Chen,
Roll, & Ross, 1986). Chen et al. (1986) hence argued that
macroeconomic factors could affect stock prices through
the impact on future dividends and/or the discount rate.
Among all economic variables, MS, EINF, UEP and EX
are commonly used by empirical research studies to test
their effects on stock prices in the USA (Chen et
al., 1986; Shanken & Weinstein, 2006) and international
stock markets (Asprem, 1989; Azeez & Yonezawa, 2006;
Kaneko & Lee, 1995). Barrows and Naka (1994), Chen et
al. (2005), Chen (2007a, 2007c) also employed those
factors to examine the association between
macroeconomic variables and hospitality stock
returns.1 Further, the potential impact of some mega-
events related to the hospitality industry is taken into
consideration as well. Particularly, Chen et
al. (2005) found that hotel stock performance in Taiwan
were strongly associated with political events, the terrorist
attacks of September 11, 2001 in the USA and the SARS
outbreak in 2003. Chen (2007c) reported that the takeover
of Hong Kong in June 1997, the 9/11 terrorist attacks in
the US and the SARS outbreak in 2003 exhibited a
significant influence on the Chinese hotel stock returns.
Before running multiple regressions based on Equation
(6), we showed correlations between DR_HK and other
macroeconomic variables over the full sample period
in Table 7. Among all variables, none highly correlates
with any other, keeping away from the possible existence
of multicollinearity. Empirical results in Table 8 further
illustrate that the negative influence of the dummy
variable DR_HK remains significant after
macroeconomic factors and non-macroeconomic event
dummy variables are added into the regressions.
Moreover, all three non-macroeconomic variables had
significant effects on market and four hospitality stock
returns. Returns were most seriously hurt by the SARS
outbreak, followed by the 9/11 terrorist attacks. The
negative impact of the SARS outbreak on the four sectors
is −14.99, −14.64, −12.21 and −26.87, respectively, and
higher than that of the Hang Seng Index. The takeover of
Hong Kong had a positive impact on Hong Kong's
hospitality stock returns. These findings are consistent
with the results of Chen et al. (2005) and Chen (2007c).
Impact of economic policy on international
tourism demand: the case of Abenomics

Global international tourism has grown to 1.2 billion

arrivals with a total export value of US$1.4 trillion,
raising tourism’s share to 7% of 2015 world exports
(United Nations World Tourism Organization
(UNWTO), 2016). This growth has raised tourism’s rank
to third behind only fuel and chemicals in world exports
(UNWTO, 2016). Given this importance, it is no surprise
that numerous international tourism demand studies have
been conducted (Crouch, 1992; De Vita, 2014; Lee, Var,
& Blaine, 1996; Song & Li, 2008). These studies focus on
various determinants of tourism demand, including
government-supported tourism (Balli, Balli, &
Cebeci, 2013; Lee, Song, & Bendle, 2010), mega-events
(Kang & Perdue, 1994; Lee, Song, & Mjelde, 2008),
marketing efforts through National Tourism
Organizations (Webster & Ivanov, 2007), and destination
promotion (Law, Goh, & Pine, 2004; Lee, 1996). In
addition to these determinants, economic conditions are
significant determinants of international tourism demand
(Prideaux, 2005). Exchange rates and relative prices,
which are highly responsive to monetary and fiscal
economic policies in both the outbound and inbound
country, help explain international tourism flows
(Edward, 1995; Eilat & Einav, 2004; Weber, 2001). The
decrease in tourism associated with the 2008 global
financial crisis illustrates the relationship between
international tourism and economic conditions
(Papatheodorou, Rosselló, & Xiao, 2010).
Since the 2008 global financial crisis, conventional
expansionary monetary policies have driven short-term
interest rates toward zero, making conventional policies
less effective in stimulating the economy (Krugman,
Dominquez, & Rogoff, 1998). In response, central banks
have undertaken unconventional policies to help revive
their economies. In the process of implementing those
policies, economic conditions are potentially altered,
causing changes in international tourism demand.
One country that has implemented unconventional
policies is Japan. Prime Minister Shinzo Abe undertook a
set of economic policies known as ‘Abenomics’, which
include unprecedented and unconventional expansionary
monetary policy and two fiscal policy packages
(expansionary fiscal stimulus and structural reform) to
stimulate economic growth (Fukuda, 2014).
Implementation of Abenomics resulted in the devaluation
of the Yen and corporate reform over the years 2013–
2014 (Economist, 2015). At the same time, the number of
Japanese inbound tourist, which decreased following the
Fukushima nuclear power plant disaster in 2011, shows a
strong rally with an average annual growth rate of 26.7%
(Japan National Tourism Organization (JNTO), 2015).
The objective of this study is to empirically investigate if
and how economic policies, including unconventional
polices influence tourism demand by exploring the
relationship between Abenomics and Japanese inbound
tourist arrivals. Not only having implemented
unconventional policies but also the fact Japan is an
island (which increases travel costs to Japan relative to
countries that are connected by land, such as between
countries in Europe) makes Japan an interesting study. In
2014, Japan’s tourism market ranked number 17
worldwide in terms of international tourism receipts while
not ranking in the top 20 in arrivals (UNWTO, 2015).
Specifically, how economic factors influence inbound
tourism from South Korea to Japan after implementation
of Abenomics is examined. An econometrics approach
based on cointegration is adopted to investigate the short-
and long-term relationships between economic policies,
economic changes, and tourism demand. South Korea is
selected for two reasons: first, South Korea is the largest
inbound tourism market for Japan; and second, South
Korean tourists to Japan may clearly reflect the effect of
Abenomics on tourism demand because of economic,
cultural, and social ties and the relative close proximity of
the two countries. There may be impacts beyond those
associated with economic factors.
This study adds to our knowledge of the role government
policies play in tourism demand by highlighting the
effects of the unconventional expansionary monetary
policy. Such policies have been used aggressively in
developed countries, including the United States, United
Kingdom, and Eurozone since the 2008 crisis. Findings
allow both the public and private sectors to see how
changes in their tourism industry are driven by
unconventional policy, contributing to the expanding
knowledge of how a country’s economic policies
influence international tourism demand.
 Abenomics

Since Shinzo Abe became the Prime Minister of Japan in

2012, his government has implemented aggressive
economic policies to pull Japan’s economy out of the
prolonged stagnation known as the two lost decades.
These economic policies, dubbed Abenomics, are a ‘three
arrows’ strategy: (1) unconventional monetary easing
(UME), (2) expansionary fiscal stimulus, and (3)
structural reform (Patrick, 2013). Abenomics is intended
to establish a vigorous economy (Guilford & King, 2013).
UME triggers depreciation of the Yen, which should
increase exports and investments creating new jobs.
Expansionary governmental fiscal stimulus and structural
reform goals are to increase employment through
expanded public spending, deregulation, and boosting
private consumption (Koo, 2013). Increased consumption,
in turn, results in economic growth and inflation, which
will fuel investment and private consumption
(Koo, 2013).
The first arrow (UME) is related to exchange rates
(Hayashi, 2014), a factor that previous studies have
shown to be an important economic determinant of
tourism demand (Hiemstra & Wong, 2002; Weber, 2001).
Conventional monetary policy involves central banks
controlling the money supply by changing the interest rate
at which institutions can borrow money from the central
bank, reserve requirements (although available, it is used
sparingly), and buying and selling government securities
(usually short-term securities) in open market operations.
The goals of such policies are furthering overall economic
growth and stability. When the transmission of monetary
policy to the money supply is severely impaired,
conventional monetary policy actions are largely
ineffective (Smaghi, 2009). In these instances, the use of
unconventional monetary policies may be warranted
(Smaghi, 2009). By definition unconventional monetary
policies are policies not generally undertaken by central
banks and may differ depending on institutional
arrangements within a country. These policies, which are
broad ranging and meant to ease financial conditions
(Smaghi, 2009), include (but not limited to) keeping
interest rates near zero, purchasing long-term government
securities and risky assets, impacting market long-term
expectations, and trying to facilitate bank lending
(Lambert & Ueda, 2014; Roache & Rousset, 2013;
Smaghi, 2009).
In November 2012, Shinzo Abe, the president of the
Liberal Democratic Party, argued that the Bank of Japan
should increase its inflation target and use ‘unlimited
easing’ to achieve this objective (Hausman &
Wieland, 2014). Financial markets responded
immediately. The Yen/Won (South Korea currency)
exchange rate depreciated by 0.9% and the Nikkei 225
stock price index rose 1.9%. After Abe and his party won
in the 2012 general election, the Bank of Japan announced
an aggressive plan in April 2013 to purchase ¥60 to 70
trillion of long-term government bonds per year to reach
their inflation target of 2% (Hausman & Wieland, 2014).
In October 2014, the Bank of Japan announced a more
aggressive monetary easing plan to purchase ¥80 trillion
of long-term bonds over the next year. As a result, during
2013 and 2014, the Yen/Won exchange rate depreciated
drastically from ¥85.1 Yen per Won (₩1,000) to ¥105.3
(Figure 1).
Finally, empirical findings show that among airlines,
hotels, restaurants and tourism firms, only hotel and
tourism stock prices are significantly influenced by the
changes in the monetary policy. These results may be due
to the following reasons. First, Nowak (1993) argues that
monetary policy changes are likely to exhibit a strong
effect on interest rate-sensitive industries. As Collier and
Gregory (1995) noted, the hotel industry is capital-
intensive, involving regular and large investment
decisions. Second, Singh and Kwansa (1999) report that
experts from the lodging and financial services industries
assert that the monetary policy would be one of the key
factors that have a profound influence on the lending
criteria and terms by financial institutions for hotel
mortgages. Consequently, changes in monetary policy can
significantly affect hotel stock performance because the
lending criteria and terms can considerably control the
ability of hotel firms to access the capital. In addition, the
China Travel International Investment Hong Kong
Limited is a holding company of China Travel Service
(holdings). The hotel business is also one of the core
businesses of China Travel Service
(holdings).2 Therefore, stock prices of the China Travel
International Investment Hong Kong Limited are also
strongly related to shifts in monetary policy.
In comparison, the restaurant business is less capital-
intensive and the performance of restaurants mainly relies
on the choice of an appropriate location and a limited
amount of capital to equip and furnish the facility
(Skalpe, 2003). Moreover, Arndt and Zellner (2003) argue
that the success of airline companies is largely due to its
hedging fuel strategy and lower operating costs.
Zea (2003) states that hedging is a common way to
manage the financial risk of input price changes, and no
airline input is more volatile than fuel. He further reports
that the Cathay Pacific Airways was one of the major
airlines that generated a big loss in operating profit due to
the fuel price increase in 2000. This may be the reason
that changes in discount rate have an impact on airline
and restaurant stock prices, but the influence is not
significant.
 Implications for the market timing
strategy
In an effort to achieve high rewards, stock investors
employ a variety of investment strategies. One popular
approach is market timing, the attempt to anticipate future
market movements and then allocate the investment
portfolios based on the prediction. In this study, hotel and
tourism stocks have a higher mean return and lower
standard deviation under the expansive monetary
environment, implying that a restrictive monetary
condition is significantly associated with lower hotel and
tourism stock returns, whereas hotel and tourism stocks
experience higher returns during an expansive monetary
period.

Moreover, both the Sharpe and Treynor ratios of hotel and

tourism stocks are positive during expansive monetary
months, but negative during restrictive monetary months,
meaning that the risk-free asset even outperforms the
hotel and tourism stocks under the restrictive monetary
policy period. These findings suggest that hospitality
stock investors can allocate their portfolios between
hospitality stocks and risk-free assets according to
different movements in monetary policy environments.

Consequently, we suggest that hospitality stock investors

invest in hotel or tourism stocks during the expansive
monetary period, but invest in risk-free assets during the
restrictive monetary period. In other words, hospitality
stock investors hold hotel or tourism stocks during the
months with a decrease in the discount rate and shift their
investment holding to risk-free assets during the months
experiencing an increase in the discount rate.
Determinants of tourism demand
Besides exchange rates and economic growth, a variety of
other factors influence tourism demand. One such factor
is the price level of tourism products and services, which
is typically measured by relative prices between the
inbound and outbound countries (Eilat & Einav, 2004;
Kim & Lee, 2016; Weber, 2001). As expected, studies
generally find a decrease in relative price in the inbound
country increases tourist arrivals. Government policies
such as tax credits for tourist expenditures and visa-free
entry can also influence demand (Lee et al., 2010).
Dimanche (2003) finds that the tax-free shopping
program sponsored by the state of Louisiana can be used
to attract more tourists and boost their spending on
shopping. Hu (2013) examines the effect of visa-free
entry on US inbound tourism from South Korea and
Malta both of which joined the US visa waiver program in
2008. He finds that after joining the visa waiver program,
there was an increase of more than 5% in tourists from
both the countries to the USA.

Special events also influence tourism demand. The

tourism industry is often a beneficiary of special events
such as the Olympic Games, World Cup, and Expos
(Athanasopoulos & Hyndman, 2008; Lee & Taylor, 2005;
Lim, 2006). Events that can cause tourists to avoid an area
include natural (e.g. earthquakes, tsunami, and epidemics)
and manmade disasters (e.g. terrorism, warfare).
Earthquakes, tsunami, terrorism, and warfare are related
to destination safety and lack of infrastructure, while
epidemics are linked to health risk and malfunction of
medical system all of which can decrease tourism (Lee,
Song, Bendle, Kim, & Han, 2012; Prideaux, 2005; Scott,
Laws, & Prideaux, 2008). For additional details on
demand modelling and international tourism, readers are
referred to the numerous reviews of this subject and
related topics (Crouch, 1992; Lim, 1997, 2006;
Prideaux, 2005; Song & Li, 2008).
Tourism which is often referred to as an industry does
not, in a technical economic sense, employ factors of
production nor operate variables traditionally employed in
the production process. It is labor intensive, and regarded
as a part of the non-traded sector of the economy, as it
provides services to both domestic and foreign sectors of
the economy. It constitutes the invisible part of the
balance of payments account. Tourism is listed as a
demand for a bundle of goods and services on the
questionnaire for the collection of primary data on
tourism. It consists of both consumption component
which is travelers who visit foreign countries on account
of leisure, and production component which is travelers
who visit countries on account of business. It is generally
common for the same persons or tourists who visit a
country for business to end up spending some period there
for leisure. As a result, tourism cannot be explicitly
regarded as a purely consumption or production good.
Additionally, unlike most goods that are carried to the end
user, tourism is a good which the end user is carried to the
goods and services (O‟Hagan and Harrison, 1984). It is
therefore regarded 6 also as imports by Gray (1966),
although in other studies it is considered as exports
(Carey, 1991). Tourism is influenced by transportation
cost, although tourism expenditure excludes
transportation cost. It is noteworthy to know that foreign
exchange is important in the decision of the tourists to
consume in the host country. Therefore among the main
determinants of tourism are income of the origin travelers,
relative prices of the host country, cost of living of the
host country which is measured by the relative exchange
rate or exchange rate of the host country, international
trade which is measured by the sum of exports and
imports as a ratio of the GDP, and transportation cost or
distance between the host and origin countries
 Tourism often assists in economic development, as it
involves the construction of infrastructure, like roads,
airports, harbors, street light, pipe borne water system,
sewer system, hotels, to name a few. It also improves the
welfare of the citizenry by providing jobs, increasing
revenues, and enhancing income distribution and the well
being of nationals. It is also an important feature of
international trade since inbound tourism demand tends to
be dominated by business travel in some countries such as
China where it features importantly in international trade
(Shah and Wilson, 2001); whereas in Jamaica, inbound
tourism is dominated by pleasure travel, nevertheless, it
could drive economic growth. Tourism carries in its trail
the development of social linkages which could result in
social infrastructure, cultural and environmental
problems. Increase in demand for 2 O‟Hagan and
Harrison (1984) list other factors such as sporting events,
political stability, and other events as well which are non-
economic as explanatory variables of tourism demand. 7
goods and services by tourists can also drive up inflation
pressure in the country. In the light of the costs and
benefits associated with tourism, we have provided an
empirical study which for the first time in the annals of
the country‟s history establishes whether tourism can be
relied on by the government to promote economic growth
and development of the country. Note that if economic
growth promotes tourism, then policymakers will not
have to design policies to allocate huge fraction of the
national income and resources to spending associated
with the promotion of tourism. If on the other hand
tourism is found to cause economic growth, then it is
justifiable for the government to spend a huge fraction of
the national income to boost the tourist industry. This will
entail the government investing more money in the
Jamaica tourist board and other related institutions, and
foregoing taxes by extending tax incentives to foreigners
to build and operate hotels, and set up other tourist
infrastructure in the country to keep the tourist industry
viable while providing enough land space for further
expansion in the future.
 CONCLUSION

In the short-term only an increase in tourist arrivals (or

real tourist expenditures) leads to an increase in economic
growth. Changes in tourist arrivals (or real tourist
expenditures) and the real exchange rates lead to changes
in economic growth. In both short-term and long-run,
changes in economic growth and the real exchange rates
do not lead to either changes in tourist arrivals or real
tourist expenditures. Additionally, changes in tourist
arrivals or real tourist expenditures and economic growth
lead to changes in the real exchange rates. Tourist arrivals
(or real tourist expenditures), real exchange rates and
economic growth are cointegrated. Among the variables
in the model, economic growth is endogenous and is
explained by tourist arrivals; real tourist expenditures and
the real exchange rates are insignificant in explaining the
country‟s economic growth. Tourism in the study is
therefore defined as tourist arrivals.
The tourism-led economic growth finding in both short-
term and long-run implies that extending incentives to
suppliers of tourism and related products to promote the
country as a tourist destination is important in increasing
the number of tourist arrivals in the country. However,
depreciation and increase in real tourist expenditures
retard economic growth, all other things being equal,
although both variables are not statistically significant.
Considering that the promotion of tourist arrivals or real
tourist expenditures boosts economic growth,
policymakers must continue with policies that promote
the country as the preferred tourist destination. The
inventory enrichment strategy which aims at taxing
inbound tourists six percent appears to be consistent with
increasing foreign exchange receipts in the sector; but if
majority of our tourists are from developed countries5 ,
then the effectiveness of relying on such a strategy to
attract inbound tourists to buy high end product in
Jamaica appears to be a daunting task. Rather, promoting
goods and artifacts that are uniquely Jamaican and
Caribbean may be the best means to induce additional
spending from such group of tourists. It is important that
the government continues to provide incentives to
encourage players in the sector to re-invest or plough-
back profit into the tourism sector, and reduce the leakage
of foreign exchange earnings by extending incentives for
hoteliers to reduce their imports of identical agricultural
and other goods produced locally, and rather use more
local substitutes. Finally, the implementation of a joint
venture policy of foreign hotel owners with Jamaican
residents can further reduce foreign exchange leakages in
the sector.